Idaho Strategic Resources, Inc. annual report, FY2012

Business Context and Reporting Period

New Jersey Mining Company, now identified in the request metadata as Idaho Strategic Resources, Inc., filed this Form 10-K for the fiscal year ended December 31, 2012. The filing describes the company as a development-stage mineral exploration and processing business focused primarily on gold, with secondary silver and base-metal interests in northern Idaho and western Montana.

The company operated or held interests in the New Jersey mine and mill, Golden Chest mine, Niagara copper-silver project, Toboggan exploration project, Giant Ledge, Copper Camp, and other prospects. Its strategy emphasized exploration and joint ventures rather than internally funded commercial mining.

Financial Performance and Position

Metric	2012	2011
Total revenue	$904,299	$1,453,176
Operating income	$88,553	$58,765
Net loss attributable to the company	$722,892	$473,085
Basic loss per share	$0.02	$0.01
Cash and cash equivalents	$9,950	$612,989
Total assets	$5,820,713	$5,549,225
Total liabilities	$723,538	$685,614
Total stockholders’ equity	$5,097,175	$4,863,611

Revenue consisted primarily of drilling and exploration contract income of $769,084, management fees of $45,341, engineering services income of $68,700, and mill processing fee income of $21,174. There was no gold production in 2012 or 2011.
Operating expenses were $815,746, producing an operating margin of approximately 9.8%. The net loss margin was approximately 79.9%, primarily because of the $822,500 equity loss from Golden Chest LLC and other non-operating expenses.
Net cash provided by operating activities was $377,157, compared with $254,250 in 2011.
Investing activities used $1,903,134, including $1,086,034 for property, plant and equipment and $822,500 of contributions to Golden Chest LLC.
Financing activities provided $922,938, including $952,764 from the noncontrolling interest in the New Jersey Mill Joint Venture. The company also made $94,841 of principal payments on notes payable and $30,156 of capital-lease payments.
Total notes payable were $315,673 at year-end, including $148,834 due within one year. Related-party notes payable totaled $222,839, including current and long-term amounts. Capital-lease obligations totaled $58,376.
Property, plant and equipment increased to $5,035,276, principally reflecting investment in the expanded New Jersey mill.
The accumulated deficit reached $8,509,851. The auditors’ financial statement disclosures state that minimal revenue, recurring losses, and limited liquidity raise substantial doubt about the company’s ability to continue as a going concern.

Material Changes Versus the Prior Comparable Period

Revenue decreased approximately 38% from 2011, driven by lower drilling, management-fee, and engineering-services activity.
The net loss attributable to the company increased approximately 53% from $473,085 to $722,892.
Cash declined by $603,039, from $612,989 to $9,950, despite positive operating cash flow. Management attributed the decline primarily to lower service income and the company’s 50% funding requirement for Golden Chest LLC.
Exploration expense decreased to $1,046 from $10,850, reflecting cash conservation. Golden Chest drilling decreased to approximately 7,000 meters in 2012 from the substantially greater 2011 program.
The New Jersey mill expansion was completed in 2012 at an approximate cost of $3.2 million, funded by United Mine Services. The mill’s capacity increased to approximately 350 tonnes per day, and NJMC retained a 65% interest in the mill venture.
The mill processed 8,470 dry tonnes of silver ore from the Crescent mine during 2012, but Crescent production was curtailed for economic reasons. The mill became idle in September 2012 and operated only intermittently thereafter.
Golden Chest remained on care and maintenance. The company completed approximately 7,000 meters of drilling and an exploration drift on the Popcorn vein, which averaged 23 grams per tonne of gold across a 0.5-meter true thickness over a 40-meter strike length. The filing states that Golden Chest had no SEC-recognized mineral reserves at December 31, 2012.
The company changed its accounting for Golden Chest LLC to the equity method and restated 2011 results, recognizing $553,205 of equity loss for 2011 and reducing previously reported assets by the same amount.
The company issued 210,000 restricted shares during 2012 for director fees and mineral lease payments, but issued no shares for cash.
Common stock bid prices declined during 2012, with the OTCQB high/low range falling from $0.24/$0.16 in the first quarter to $0.14/$0.06 in the fourth quarter.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

Management planned limited gold production in 2013 by processing stockpiled low-grade ore and potentially mining higher-grade material from the Popcorn vein at Golden Chest. The New Jersey mill was expected to operate part time on Crescent and Golden Chest stockpiles.
Future exploration and development spending depends primarily on securing capital from existing or new joint-venture partners. The filing does not provide quantified 2013 revenue, production, earnings, or capital-expenditure guidance.
Management expected Golden Chest activities in 2013 to remain minimal, primarily to help defray holding costs and property payments.
The company’s going-concern disclosure identifies dependence on additional equity offerings, joint ventures, drilling income, management fees, and potential gold sales.
Key operating risks include metal-price volatility, unsuccessful exploration, permitting delays, limited access to capital, mine-development and production risks, environmental liabilities, regulatory changes, competition for skilled labor, and dependence on joint-venture partners.
The Golden Chest acquisition remains secured by the sellers’ first mortgage. As of December 31, 2012, Golden Chest LLC had paid $1,125,000 and owed $2,375,000 over the following four years, with a final $250,000 payment due in the seventh year.
The company’s properties are associated with the expanded Bunker Hill Superfund Site. NJMC reported no cleanup notification and stated that the EPA’s applicable record of decision did not include its mines, but potential environmental liabilities remain possible.
The company reported four significant-and-substantial mine-safety citations in 2012. Three carried $100 penalties, the fourth was pending assessment, and all were cured through corrective action. No mining-related fatalities or legal actions requiring disclosure were reported.
The New Jersey mine has a reported proven and probable reserve block of 51,604 metric tonnes grading 3.20 grams per tonne of gold, containing 5,310 ounces, using a 1.5 grams-per-tonne cutoff. The company states that it is solely responsible for these reserve calculations.

Important Facts for Investors to Verify

Confirm the company’s current legal name and ticker, because the supplied metadata identifies Idaho Strategic Resources, Inc., while the filing itself is for New Jersey Mining Company and trades under NJMC.
Assess liquidity and financing availability in light of only $9,950 of year-end cash, $148,834 of current notes payable, and the disclosed substantial doubt regarding going-concern status.
Review the Golden Chest LLC debt schedule, funding obligations, equity-method losses, and the absence of SEC-recognized reserves.
Verify whether the expanded New Jersey mill achieved sustained utilization after Crescent mine production was curtailed and whether planned stockpile processing generated material cash flow.
Evaluate the basis and independence of the New Jersey mine reserve estimate and distinguish reported reserves from exploration targets and historical assay results.
Review the 2011 restatement arising from the change to equity-method accounting for Golden Chest LLC.
Monitor environmental, reclamation, permitting, mine-safety, and Superfund-related exposures, including the reported asset-retirement obligation of $9,797 and estimated New Jersey mine reclamation costs of $21,000.
Consider dilution and funding risk from future equity issuances, including the 5,961,550 warrants outstanding at December 31, 2012 with a $0.30 exercise price and expiration on January 31, 2013.